ECN 222 1st Edition Lecture 9Outline of Last Lecture - How much stuff?- Long-run Aggregate Supply- Income and Expenditure- Gross Domestic Product (GDP)- Components of GDPOutline of Current Lecture - GDP- Investment- Government Purchases- Net Exports- Calculating GDP- Nominal and Real GDPCurrent Lecture***GDP- is the market value of all final goods and services produced within a country in a given period of time. Y = C + I + G + NXConsumption (C)- HH purchases of goods and servicesThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.- Rent- Imputed rentInvestment- Is total spending on goods that will be used in the future to produce more goods- Includes spending on:o Capital equipment (e.g. machines, tools)o Structures (factories, office buildings, house)o Inventories(goods produced but not yet sold)- Note: “Investment” does not mean the purchase of financial assets like stocks and bonds. It is tools and equipment.House “ “Housing Services”Government Purchases (G)- Is all spending on the goods and services purchased by government at the federal, state, and local levels.- G excludes transfer payments, such as social security or unemployment insurance benefits- They are not purchasing goods and servicesNet Exports (NX)- NX = Exports – Imports- Exports represent foreign spending on the economies goods and services- Imports are the portion of C, I, and G that are spent on goods and services produced abroadAdding up all the Components of GDP gives:Y = C + I + G + NXProducesConsume these each nightPart of Consumption “C”Produces Housing ServicesGood that produces more goods and servicesInvestment “I”Supply = DemandUS GDP and Its Components, Q4 2014Billions % of GDP Per CapitaY $17,710 100 56,044C $12,112 68.3 38,329I $2,960 16.7 9,367G $3,186 18 10,082NX -$549 -3.1 -1,737Largest ConsumptionsImport more than we export- GDP US = Trillions- GDP and its components- In each of the following cases, determine how much GDP and each of its components is affected (if at all)A. Debbie spends $200 to buy her husband dinner at the finest restaurantB. Sarah spends $1800 on laptop to use in the business laptop built in ChinaC. General Motors builds $500 million worth of cars, but consumers only buy $470 million worth of themD. Jane spends $1200 on a computer to use in her editing business. She gotlast year’s model on sale for a great price from a local manufacturer.A) Debbie $200 on dinnerY = C + I + G + NXY = ^ $200 C = ^$200B) Sarah, $1800 Chinese Laptop for businessY = C + I + G + NXI = ^$1800 NX = -$1800C) GM Sells $500 M Cars, $470 soldY = C + I + G + NXY = ^$500 C = ^$470 I = ^$30D) Jane- $1200 laptop for business “Old Stock”Y = C + I + G + NXI = ^$1200 and I = -$1200Calculating GDP- Sum up Price * Quantity for each goodPrice Quantity Price QuantityYear2010 $10 400 $2.00 10002011 $11 500 $2.50 11002012 $12 600 $3.00 1200GDP = Sum up PxQ for each goodGDP10 = (10x400) + (2x1000) = 6,000GDP11 = (11x 500) + (2.50x1100) = 8,250GDP12 = (12x600) + (3x1200) = 10,800Percentage Change = New – Old x 100 Quantity and Price is rising.Nominal and Real GDP- Which is worth more? o $4.99 or £2.50- Do you value each in dollars?- Same thing for GDP across time, but value of dollar changes- Changing Dollar Valueo Need to use a “Constant” dollar to compare values across time- Real Versus Nominal GDPo Inflation can distort economic variables like GDP, so we have 2 versions of GDP:PizzaLatteOld- One is corrected for inflation, other is noto Nominal GDP values output using current prices, it is not corrected for inflationo Real GDP values output using the prices of a base year.o Real GDP is corrected for